United States Central Bank Statement

Author: | Published: 5 Sep 2017

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The healthy state of our economy and favourable outlook
suggest that the Federal Open Market Committee (FOMC) should
continue the process of normalising monetary policy. The
Committee has been patient in raising rates, and that patience
has paid dividends. While the recent performance of the labour
market might warrant a faster pace of tightening, inflation has
been below target for five years and has moved up only slowly
toward 2%, which argues for continued patience, especially if
that progress slows or stalls. If the economy performs about as
expected, I would view it as appropriate to continue to
gradually raise rates. I would also see it as appropriate to
begin the process of reducing the size of the balance sheet
later this year. Of course, both decisions will depend on the
performance of the economy.

To put this process in context, consider where we have come
from. Ten years ago, in the summer of 2007, we were just
entering the most painful economic crisis since the Great
Depression. The crisis and its aftermath prompted large-scale
policy interventions by the Federal Reserve and other
authorities to avert the collapse of the financial system and
prevent the economy from spiralling into depression.

Most of the Federal Reserve's targeted financial measures
– such as liquidity facilities to ensure the flow of
credit to households and businesses – were withdrawn
soon after the crisis as orderly conditions resumed in
financial markets. In contrast, the FOMC's easing of monetary
policy increased over time as the longer-term economic effects
of the crisis gradually became clear. From 2007 through 2013,
the FOMC added ever greater support for the economy. From late
2008, with rates pinned at the zero lower bound, the Committee
resorted to unconventional policies to put additional downward
pressure on long-term rates, including strong calendar-based
forward guidance regarding the likely future path of the
federal funds rate, and several rounds of large-scale asset
purchases (often referred to as quantitative easing (QE)).

Both the federal funds rate and the balance sheet are
currently set at levels intended to provide significant support
to economic activity. Normalisation of the stance of monetary
policy will return both tools to a more neutral setting over
time. That process can be said to have begun in 2014, when the
FOMC ended its asset purchases and began active discussions on
lifting the federal funds rate from its lower bound. Our first
rate hike came in December 2015, with another in December 2016,
and one additional increase so far this year. The normalisation
process is projected to have several years left to run.

This is an extract from the speech "Thoughts on the
Normalization of Monetary Policy" given by Governor Powell at
the Economic Club of New York, New York, June 1 2017. The full
text can be accessed free of charge at www.federalreserve.gov.